It could have been a Forbes cover story: In 1978, a destitute Chinese village doomed to crop failure siphons off state irrigation funds to buy a crude steel strip mill. Within a year, the village earns more than all its profits since the 1949 revolution combined. By 1990, with 200 subsidiary companies and revenues of $110 million, it has become China’s richest village, producing 3 percent of the country’s entire steel output.

Then the success story turns sour. The pioneering capitalists heading the village are imprisoned as “ideological enemies of the Communist state,” as Bruce Gilley explains in his account of northeast China’s tiny Daqiu village.

Gilley, contributing editor at Hong Kong’s Far Eastern Economic Review, has a clear aim — to vindicate the disgraced peasant leader Yu Zuomin, who proves to be an outspoken champion of free enterprise in a hostile environment. His book is a fascinating read on the contradictions in communist China since its “opening” 23 years ago.

Daqiu’s 1,600 residents launched their steel production experiment during the precarious period between Mao Zedong’s death and Deng Xiaoping’s push for economic development. As unofficial producers working outside the state system, they lacked easy access to state funds and materials for their expanding industries, but were able to operate more flexibly. Deng was impressed.

By 1984, township-village enterprises like Daqiu’s were recognized all over China by Beijing, and the village, located 45 km from the coastal city of Tianjin, had become a national tourist attraction — as well as a source of envy and a target of ideological attack.

Daqiu’s “economics first” philosophy, for example, and its merit-based pay system (in which factory managers received 1 percent of profits) were heresies to the Communist Party’s Maoist wing.

But official boosts to liberalization (such as Deng’s “southern tour” in 1992) strengthened Daqiu’s hand. Village leader Yu was able to survive the party’s internal tug-of-war over the pace of economic “reform” while advocating the right of China’s rural multitudes to produce wealth without the interference of the urban leftist elite.

In the process, Yu became a sort of Lee Kuan Yew of Singapore in the Chinese countryside, bringing enormous wealth to his people through no-nonsense, if sometimes brutal, paternalism. With what Gilley calls “an almost paranoid fear of dissent and a cavalier disregard for the law,” Yu instituted an autocratic nepotism, handing top positions to family members while silencing critics (one of whom was killed by a village mob in 1990). And his own income rose to nearly 40 times the local average.

The village was already on this dangerous roller-coaster in and out of official favor when Yu set his sights on the political system in the late 1980s.

Villages in China today mostly run themselves, unlike towns, which are administered by the county seat. When Beijing decided in 1987 that villagers would have some say in the selection of their local Communist Party committees, Yu ignored the decree. Instead, he gutted the village committee and replaced it with his industrial conglomerate’s board of directors. Clearly, this was courting disaster.

Then, in 1992, revelations of mismanagement in Daqiu led to the brutal murder of an economic adviser. When outside investigators were sent in, Yu detained them for “interfering” in local affairs, leading to a month-long armed standoff between paramilitary soldiers and the villagers; incredibly, a compromise was reached. But, to Beijing, Yu was out of control. His clumsy coverup of the murder was a chance to eliminate him, and he, among others, was tried and convicted of various crimes — bribery, obstruction of justice — and sent to prison.

Normally such crimes would have been overlooked in China, argues Gilley, and he paints a picture of a kangaroo court convicting Yu and an obedient press delighting in this renegade’s fate.

Yet Gilley is reluctant to concede that the manner in which Beijing dealt with the little rebellion (with a truce) and the conditions in which Yu eventually died (in the cushy wing of a hospital reserved for party cadres) are both remarkable.

To top it off, Yu’s efforts in advocating the freedom to pursue wealth for the countryside were not in vain: Within four years of his imprisonment, township-village enterprises had won equal status with state-owned industry, and soon one out of every five Chinese laborers was working in one.

Unfortunately, Yu’s greatest accomplishment — bringing his people spectacular wealth — proves less brilliant under scrutiny. For instance, Daqiu made fortunes playing price discrepancies (buying resources at official prices and selling them at much higher market prices) as the communist system refashioned itself into a market economy.

But, more significantly, Daqiu fully exploited the nation’s strict restrictions on population movement.

During Gilley’s one trip to Daqiu in 1992, after salaries there had surpassed a figure 20 times the national average, his “main impression — was of a huge and dusty work-site overrun by migrant workers.”

These migrants, who were four times as numerous as the locals, received only one-quarter of residents’ pay and no social benefits. Certainly, Daqiu’s per capita income skyrocketed thanks in no small part to their exclusion from the profits and from the accounting books.

The point is made even clearer when, after the leadership “purge,” the state granted these migrants residency and equal pay and benefits followed. Largely as a result, the village’s per capita income tumbled to a sobering — and perhaps more realistic — tenth of its previous level.

If, as Gilley argues, authorities had indeed found Yu’s capitalist program distasteful, they were, paradoxically, clearly not averse to private wealth creation nor to yawning income disparities.

As Gilley points out, the granting of residency to transient labor was no social welfare policy, but a cynical political one designed to dilute the proud local identity in order to lessen the threat of unrest, as Beijing has done in the Xinjiang and Tibet regions.

Daqiu had also been a testing ground for all sorts of shareholding experiments. When Beijing upgraded Daqiu village to town status and assumed direct control by abolishing the existing industrial conglomerate, there was asset-grabbing of the manic sort suffered by post-Soviet Russia. Overnight, for instance, two of Yu’s younger cousins controlled 70 percent of China’s second-biggest rural enterprise in terms of output.

Revealingly, corporate executives moonlighting as party cadres effectively took over Daqiu after the outside Communist leadership took control.

Daqiu was the mouse that roared. The fact that Beijing didn’t roar back in brutal Tiananmen fashion is very significant. The faceless numbers of the vast peasantry left behind by reforms are hardly so lucky. How widespread are their challenges to authority? Very, according to a Central Propaganda Department gag order issued to the media in October 1996, three years after Yu’s imprisonment. “There have been over 10,000 cases of demonstrations and protests in urban and rural areas within the past year,” it reads. “All of these are not to be covered.” Which means, of course, that to the Chinese public and the world, they don’t exist.